We track 13F filings from hedge funds and other notable investors for a variety of purposes. First, it helps us in our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). Second, we can treat ownership by a particular hedge fund similarly to a stock screen- as a source of free investment ideas- and combine ownership with other criteria including a low PEG ratio (a low PEG ratio is an indicator of upside potential in that it implies high consensus earnings growth estimates given the P/E multiple). Here are five stocks which billionaire Andreas Halvorsen’s Viking Global owned at the end of December which have low PEG ratios (or see the full list of Halvorsen’s stock picks):
The fund increased the size of its position in Capital One Financial Corp. (NYSE:COF) by 36% to a total of nearly 14 million shares. Capital One looks like a good value in quantitative terms: it trades at only 9 times trailing earnings, a level at which the market would be taken as expecting declines in net income, and at a discount to the book value of its equity at a P/B ratio of 0.8. The sell-side, however, is projecting growth in the business and we think that Capital One is certainly worthy of further research.
Halvorsen and his team cut their stake in Schlumberger Limited. (NYSE:SLB) by nearly half but still owned about 4 million shares of the oilfield services company at the end of December. Schlumberger is less of a pure value stock at its current valuation, with a trailing earnings multiple of 18, but here the market and analysts are expecting earnings to rise strongly over the next several years. However, in the fourth quarter of 2012 earnings were actually down slightly versus a year earlier; revenue increased by 9%, so perhaps over time net income will improve at a similar level.
Health insurer Humana Inc (NYSE:HUM) was another stock in Viking Global’s portfolio which meets our criteria for high upside potential, given that the five-year PEG ratio is 0.8. Health insurers are generally trading at low earnings multiples- we think that part of the cause may be concerns about future regulations of the industry if health care costs continue to rise- and Humana is no exception given the trailing P/E of 9. With business about flat, we think that is cheap enough to make the company worth investigating.